The Hong Kong Securities and Futures Commission has officially announced the list of approved virtual asset spot ETFs, including Bitcoin spot ETFs and Ethereum spot ETFs under Huaxia (Hong Kong), E Fund International, and Bosera International. These 6 spot ETF products will start receiving subscription orders from April 25th to 26th and will be listed on the Hong Kong Stock Exchange on April 30th.
The 6 Hong Kong spot ETFs have gained a good initial scale through the subscription orders. According to SoSo Value data, the total net value of the 3 Bitcoin ETFs is $248 million, and the total net value of the 3 Ethereum ETFs is $45 million, with a combined net value of nearly $300 million. In comparison, the total net value of the US Bitcoin spot ETF products, excluding Grayscale (GBTC) which converted from a trust to an ETF, was only $130 million on the first day. However, in terms of trading volume, the Hong Kong crypto ETFs are much lower than their US counterparts. According to SoSo Value data, the 6 Hong Kong crypto ETFs had a trading volume of only $12.7 million on the first day of listing on April 30th, far below the $4.66 billion trading volume of US ETFs on their first day.
We have observed a significant mismatch between the initial scale and the trading volume of the Hong Kong crypto ETFs. How large can the Hong Kong crypto spot ETFs become, what kind of impact can they have on the crypto market, and how to seize the related investment opportunities? In this analysis, we will explore these questions through the supply and demand relationship of Hong Kong ETFs.
Demand Side: Limited incremental funds due to restrictions on mainland Chinese investors, leading to lower trading volume
The Hong Kong crypto ETFs still have strict restrictions on investor qualifications, with mainland Chinese investors unable to participate in the trading. For example, Futu Securities requires the account holder to be a non-mainland Chinese and non-US resident to be eligible for trading. It is currently not allowed for mainland Chinese funds to trade through the Southbound Stock Connect, and it is expected to be difficult to achieve in the near future.
In terms of fees, Hong Kong crypto ETFs do not have an advantage compared to US ETFs and are not very attractive to institutions looking for long-term holdings. According to SoSo Value data, the management fees of the 11 US Bitcoin spot ETFs, except for Grayscale and Hashdex, are around 0.25%, while the comprehensive fees of the 3 Hong Kong Bitcoin ETFs are relatively high, with Huaxia at 1.99%, E Fund at 1.00%, and the lowest Bosera at 0.85%. Even with a short-term reduction in management fees, they still do not have a fee advantage. With the difference in fees, institutional investors who are optimistic about the crypto market and looking for long-term holdings will have lower holding costs with US Bitcoin ETFs.
Looking ahead, the funds on the demand side may mainly come from two sources: 1) Hong Kong retail investors. For retail investors with a Hong Kong ID card, the threshold for purchasing Hong Kong crypto ETFs is lower. For example, to purchase a US Bitcoin spot ETF, one needs to have a Professional Investor (PI) qualification, which requires a portfolio of HKD 8 million or total assets of HKD 40 million. The Hong Kong Bitcoin spot ETF allows retail investors to trade, and the trading hours are also more suitable for the Asian time zone, which is an important increment. 2) Traditional investors interested in Ethereum. The Hong Kong Ethereum spot ETF is the first global launch, so for investors who have difficulty holding the currency but are optimistic about the future of Ethereum, they may bring incremental volume to the Ethereum ETF.
Supply Side: In-kind creation and redemption increase the supply of ETF shares and enhance the initial scale
The biggest difference between Hong Kong crypto spot ETFs and US Bitcoin spot ETFs is the addition of in-kind creation and redemption in addition to cash creation and redemption. This directly determines that Hong Kong crypto ETFs may have more supply of ETF shares at the share level.
In-kind creation and redemption refer to the exchange of cryptocurrencies (Bitcoin or Ethereum) when investors subscribe (create) or redeem ETF shares, instead of using cash. During the subscription process, investors provide a certain amount of cryptocurrencies to the ETF in exchange for ETF shares. During the redemption process, investors return ETF shares in exchange for the corresponding cryptocurrencies.
By referring to the comparison of the Hong Kong crypto subscription process in Figure 2, we can see two major differences brought about by in-kind creation and redemption:
1) Holders can subscribe directly with their own cryptocurrencies: For some large holders, such as miners, it is easy for them to convert their own coins into ETF shares. After holding ETF shares, they can support cash redemption or sell them directly for cash on the Hong Kong Stock Exchange, providing a very flexible handling method.
2) In terms of the crypto market, in-kind creation and redemption do not bring incremental funds into the market but only transfer cryptocurrencies between different accounts. Cash creation and redemption, on the other hand, bring actual buying pressure to on-chain crypto assets.
Therefore, the subscription side of Hong Kong crypto ETF shares includes both traditional cash subscribers and large holders. Although the specific share of in-kind creation and cash creation has not been disclosed by each company, according to public communications from OSL, the proportion of the initial batch of in-kind creation may exceed 50%. This also explains why the initial fundraising scale of the Hong Kong crypto ETFs can reach nearly $300 million, which cannot be achieved without in-kind creation. But on the other hand, these in-kind created ETF shares may be converted into sell orders in subsequent secondary market trading.
Considering the comprehensive analysis of supply and demand, unlike the US Bitcoin spot ETFs, we can track the daily net inflow of funds into the ETF (Total Net Inflow) to intuitively judge the impact of Bitcoin ETFs on the crypto asset prices. The supply and demand of Hong Kong crypto spot ETFs is more complex, and the data disclosed by various fund companies cannot clearly distinguish between in-kind and cash creation and redemption. In this context, we believe that the premium/discount rate in the open market (traded on the Hong Kong Stock Exchange) may be a better indicator to observe.
As we analyzed earlier, in the on-exchange trading on the Hong Kong Stock Exchange, the premium/discount reflects the balance of power between supply and demand. If the ETF is trading at a discount, it indicates that the selling pressure is stronger, supply exceeds demand, and market makers have the motivation to buy ETF shares at a discount on the Hong Kong Stock Exchange and then redeem them from the ETF issuer to profit from the price difference. This will reduce the overall net asset value of the ETF, cause capital outflows, and have a negative impact on the crypto market as a whole. The process can be summarized as follows: ETF discount -> stronger selling pressure -> possible redemption -> negative impact on the crypto market. Conversely, if the ETF is trading at a premium, it indicates that the buying pressure is stronger, demand exceeds supply, and it may generate subscriptions, which has a positive impact on the crypto market.
According to SoSo Value data, as of the close on April 30th, except for Jiashi Bitcoin spot ETF (3439.HK) and Jiashi Ethereum spot ETF (3179.HK) which had negative premiums of -0.18% and -0.19% respectively, all other products had positive premiums. The highest premium generated during intraday trading was 0.33%, indicating restrained selling pressure and relatively strong buying pressure on the first day. Considering the influence of market makers on the first day of listing, this premium/discount data should be continuously monitored. If the premium can be maintained, it is expected to continue to attract investors’ subscriptions, especially from coin holders. In that case, the scale of the Hong Kong crypto spot ETFs may exceed the estimated value of $500 million. However, if it turns into a discount, attention should be paid to arbitrage trading and redemption of ETF shares, which may lead to the ETF issuer selling cryptocurrencies and causing a downturn in the crypto market.
The Hong Kong crypto ETFs also have an important value for investors: they provide a path for the conversion and circulation of crypto assets into tradable financial assets
The rapid approval of Hong Kong crypto spot ETFs, although may have a smaller short-term impact on the crypto market compared to US spot ETFs, provides a channel for the conversion of crypto assets into traditional financial assets in the medium to long term through the mechanism of in-kind creation and redemption. By subscribing in-kind, cryptocurrencies can be converted into ETF shares, and ETF shares can serve as proof of assets in the traditional financial market due to their fair value pricing and liquidity. With this, various leveraged operations, such as collateralized lending and structured product construction, can be conducted, further connecting the value of crypto assets with the traditional financial market and allowing for more comprehensive reflection and realization of the value of crypto assets.
From a macro and long-term perspective, the approval of Bitcoin and Ethereum spot ETFs in Hong Kong is an important development for the global crypto market. This policy will have a long-term impact on the financial landscape of the Chinese-speaking region and is an important step towards further legitimizing cryptocurrencies in the global financial system.
Tags:
2023 market trends
ETF
Ethereum
Wu Shuo blockchain real
Bitcoin
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Note: The translation is a direct translation and may not flow as smoothly as a native English article.
